After setting up capacities to generate 130,000 MW of power till date, India still needs 70,000 MW of additional power over the next seven to ten years.

This would mean a business opportunity of Rs 50,000 crore for the electrical equipment industry, which does not include power generation equipment and high capacity transformers.

This spells good news for Indo Asian Fusegear, which manufactures switchgears and energy efficient lighting products ( like compact fluorescent lamps) for commercial and residential purposes. It has a wide network of 850 major distributors and 10,000 retail dealers. The company is on a major expansion spree in India and abroad, which will almost quadruple its revenues by 2009-10.

In FY07, it reported robust growth of 45 per cent year on year in turnover of Rs 214 crore while net profit grew only 10 per cent to Rs 17.38 crore. Margins will improve due to an emphasis on technology and processes, constant innovation through R&D and distribution network.

V P Mahendru, CMD and president-operations, shares the company’s strategy to achieve Rs 1,000-crore turnover with Priya Kansara. Here are the excerpts of the interview. The Indo Asian Fusegear stock has started looking up gaining 23 per cent in the last one month after substantially underperforming for the last one year due to subdued growth in profits. It trades at a price to earnings multiple of 13.1 times for FY07.

What growth rate do you expect in your businesses? The Indian electrical equipment industry is growing at 20-30 per cent. However, we are outperforming the market by growing at an annualised rate of 40-50 per cent in the last three years. After our expansion plans are complete, the growth will catapult to 80-90 per cent over the next few years.

What are the expansion plans?

We recently set up three major plants at Haridwar in Uttaranchal, which is also a tax-free area. One of the plants is for switchgears, another for lighting products and the third one is in joint venture with Simon of Europe for manufacturing complete home automation products for safety, security and energy saving at an investment of 5.6 million euros.

Now, we have a total nine plants based primarily in North India. We are also setting up a new plant for cables and wires around Delhi, which will be our tenth plant.

While the switchgear and lighting product units have already started contributing in a small way, the complete benefits will start from the second quarter.

The third unit will start its trial production by December 2007. The cables and wires plant will take about one or one-and-a-half years time to materialise. All this will quadruple our revenues by the year 2009-10.

How much have you invested in these projects? And how have you funded the expansion? We invested Rs 60 crore last financial year and plan to invest about Rs 100 crore over this year and next. We are funding the projects by way of internal accruals and loans almost in the same proportion.

What will be the impact of rising interest rates on the company?

We don’t think it will have an impact on the company as the incremental volumes after the expansion will take care of the rising interest costs. Also, our constant innovation efforts and cost reduction measures will minimise the impact of the rising costs. The margins especially net margins, declined by 444 basis points year on year in FY07. What is the reason and outlook?

The margin pressure was due to rising raw material costs, salaries, change in production processes, investment in R&D and appreciating rupee to some extent.

However, our higher investment in R&D in the past is now helping us fetch better realisations due to better and differentiated products.

Moreover, our initiatives of cost reduction are also yielding results. We are constantly trying to raise the proportion of the high margin products like switchgear and CFLs, which form 40-50 per cent of our turnover at present.

So while costs are constantly rising, our realisations, margins and profits are also improving. In the end, we want to be the gainers and our effort is to make sure that our revenues increase at a sharper rate than the costs. Our long term target is 10-12 per cent net profit margin from the latest 7.4 per cent in FY07.

What is your view on competition from your closest peer Havell’s India and big players like L&T and Siemens in switchgears?

We believe that competition from companies like Havell’s is very healthy. Moreover, our operations are very competitive and cost effective and we are doing quite well in terms of new products, product acceptability and R&D.

As far as the presence of large players like L&T and Siemens in switchgears is concerned, we actually don’t have any strong competition from them. While they are mostly into high tension switchgears, we are strong enough in low tension products.

But high tension means higher margins. Isn’t it?

Yes, definitely. Demand for high tension products has grown rapidly in the past three years. But there is still lot of room left in the low tension segment and there is so much more to do.

What about the unorganised market?

There is little fear from the unorganised market as the demand at the higher end of the pyramid is growing faster than the lower end unlike in the past. People in rural areas are now getting aware about the brands and good quality and their aspiration levels are growing higher.

Any plans to enhance the exports and grow overseas business?

At present, exports of about Rs 40 crore form 17 per cent of net sales. However, our target is to increase it to over Rs 400-500 crore by 2009- 10. While our products are already well accepted in the Middle East due to our presence there since past 35 years, we also plan to focus on the developed markets like the US and Europe, as they are looking for production bases which are far more economical.

Thus, while developed markets will form 60 per cent of exports, developing countries will contribute the rest.

Besides tapping the overseas markets, we have entered into a three-way joint venture agreement with a Saudi-based company and an American company for setting up a $9 million plant in Saudi Arabia, which will produce a variety of lighting equipments initially and then switchgear also.

We perceive a tremendous business from Saudi Arabia due to a large domestic population, fast growing local demand and proximity to 20 countries connected by road. The project will start delivering results by the end FY08.

What are the other such initiatives taken by the company?

Apart from the above measures, we are also taking advantage of the retail boom in the country. We are in contact with major malls like Reliance Retail, Spencer’s Retail and Pantaloon’s home improvement chain HomeTown. We do a lot of in-house branding with the concept of shop-in-shops.

Besides, we also have tie-ups with the government for supply of CFLs and are also getting into larger contracts elsewhere in the world with utilities for supplying CFLs.